Monday, November 25, 2013

IBM: Dark Horse of the Tech Sector

If asked to name some of the biggest, most powerful, and influential tech companies, most people would likely respond with a handful of names like Apple, Google, and Microsoft, maybe even Samsung. This is because ads for these companies’ products are constantly thrown in front of consumers.

What's interesting is that one of the oldest and most steadfast tech companies has drifted out of sight for today's common consumer. However, since 1924, International Business Machines (IBM) has been an iconic innovator in the tech sector, and has recently taken steps that could rocket the company back to the forefront, bringing with it a host of opportunities for significant growth and profit. Its partnership with NVIDIA (NVDA) will allow IBM to accomplish those goals.

No consumer retail products

It's been years since any IBM-branded products lined shelves in electronics stores. Despite being perhaps the most influential PC innovator for over two decades, in 2004, IBM made the decision to sell its PC division to Lenovo and instead focus on selling software and services. Since a larger portion of IBM's business has been geared toward business and enterprise customers, the general public has been exposed to the brand less frequently, causing IBM to fade into the shadows.

The company may have retracted from the spotlight, but long-term investors have been rewarded handsomely. Over the past ten years, the share price has more than doubled from around $90 to more than $180; over the past five years, shares have increased more than 142% from a low point of around $75. IBM has also paid a consistent quarterly dividend since May 1987.

Human Brain Project

IBM may likely emerge from the proverbial shadows, as the company's progress in the fields of supercomputing and artificial intelligence could lead to revolutionary advancements in both hardware and software. IBM is a major participant in the Human Brain Project, an effort to create a working computer modeled after the human brain in exact detail "all the way down to the biochemical level of the neuron." The ultimate goal of the Human Brain Project is to create a computer that thinks like a human being, meaning that it analyzes and interprets data in the same way humans do -- literally, an artificial intelligence that can think, adapt, and learn from past experiences.

What may have once been scoffed at as fantastical science fiction is now a plausible reality, albeit a number of years away. As the creator of one of the world's most advanced and renowned supercomputers, dubbed Watson, IBM can remain an integral contributor to the project, and subsequently benefit from any new technology arising from it.

Further evolving Watson

Additionally, IBM has been making impressive advancements evolving its own supercomputer designs. Since 2010, IBM supercomputers have ranked No.1 on the Graph500 Supercomputing List, which "ranks high-performance computing systems on the basis of processing massive amounts of Big Data." New 3D silicon technology called "through-silicon vias," or TSVs, has helped the company address the severe heating complications that come from running such high numbers of dense, massive configurations that typically "required prohibitive amounts of electrical power and threw off problematic amounts of waste heat."

Successful implementation of TSVs alone could be worth billions to IBM. The company continues to upgrade Watson and migrate more of its supercomputing capabilities to cloud-based systems. This will allow easier access for developers wishing to implement cutting-edge search, database, and personalization features into their own software, in turn generating profit for IBM when that software is finally released to the public. Mike Rhodin, senior VP of IBM's software solutions group, stated, "The idea is to make Wason the operating system of the cognitive era."

Strategic partnership

IBM also recently stated that it will begin using NVIDIA's new Tesla graphics chips to improve the computing speed and capabilities of its supercomputers. According to NVIDIA, this partnership, announced at the SC13 conference on Monday, "marks the first time that GPU accelerator technology will move beyond the realm of supercomputing and into the heart of enterprise-scale data centers. The collaboration aims to enable IBM customers to more rapidly process, secure and analyze massive volumes of streaming data." NVIDIA's Tesla GPUs have the potential to dramatically increase the speed with which IBM customers utilize the company's already-monumental supercomputing capabilities, improving both corporate software data needs and end-consumer application response rates.

NVIDIA shares have increased over 33% since November 2012, despite year-over-year revenue declines of 12.5%, primarily due to a 54% drop in Tegra processor revenue. However, with the release of the company's new Tesla K40 GPU Accelerator, combined with the new IBM partnership, it's unlikely that NVIDIA's 85% market share in the High Performance Computing arena is at risk. In fact, once IBM finalizes the transition of Watson's capabilities to its cloud servers and begins opening the door to developers, revenue for both companies should see a boost.

Foolish bottom line

As data needs continue to increase exponentially, so does the need for faster computing and processing capabilities. IBM is the dark horse of the tech sector, having quietly remained in the background while the industry's current big dogs battle for superiority. The supercomputing capabilities of IBM's Watson, soon to be made available to developers and enhanced with NVIDIA's latest Tesla GPU, will surely result in industry-changing improvements in both the quality of information accessed by new software and the speed with which such information is garnered. This will ultimately translate into solid growth for both IBM and NVIDIA.